Unit 23: Economic growth & Business Cycle

The Economic Cycle/ Business Cycle

Refers to a phenomenon that a cyclical economic expansion and economic contraction cycle in the economy.

Qualities of Phrase of Business/ Economic Cycle

1. Expansion/ Growth: During this phase, consumer and business spending rise, unemployment will drop, which will further aid consumer spending

2. Peak: After a period of growth, an economy will reach a peak, where business is producing at or near full capacity, and the economy is at or near full employment

3. Recession: This is a phase when real GDP begins to decline. Consumers and business reduce their spending, unemployment rises, investment declines, and pessimism about the economy is likely to grow

4. Trough/ Depression: This is the lowest point of the business cycle. Factories will be operating below capacity, allowing unemployment to reach high levels. Jobs are difficult to find in this phase, and many businesses may fail.

5. Recovery

Recovery phrase

Recovery phase	Markets
Stimulatory economic policies	Short rates low or falling
Inflation falling	Bond yields bottoming
	Stock market rising
	Commodities rising
	Property prices bottoming

Expansion phrase

Early upswing phase	Markets
Increasing confidence	Short rates at neutral
Healthy remains low	Bond stable
Inflation remains low	Stock market strong
	Commodities strong
	Property prices picking up

Boom (peak) phrase

Late upswing phase	Markets
Boom mentality	Short rates rising
Inflation gradually picks up	Bond yields rise
Policy becomes restrictive	Stock market topping out
	Commodities rising strongly
	Property prices rising strongly

Recession phrase

Economy slows/ enters recession	Markets
Confidence suddenly drops	Short rates peaks
Inflation continues to rise	Bond yields tops out
Inventory correction begins	Stock market starts falling
	Commodities starts falling
	Property prices tops out

Internal and external theories of business cycle

Business cycle (Juglar)

Is a regular cycle. It is natural law, automatically self-generating and automatically end. The business cycle depends on the market economy.

Business cycle (Joseph)

Has the external theories because these causes are direct impacts on business cycle. It makes a rise or fall in the demand and supply on the market.

Causes of business cycles

Internal Factors	External Factors
Consumption: consumer spending increase, business will increase production → hire more workers and purchase more materials and capital goods consumer spending decrease → opposite	Invention and innovation: Major changes in technology can influence the business cycle. Usually, technological changes move the economy in a positive direction, but this is not always so
Business investment: The purchasing of capital goods increases the number of jobs in the economy, because people have to make those goods. If investments increases, the economy will grow If investments decreases, the economy will contract	Wars and political events: The impact of such events on the economy are very fact specific - in other words, difficult to generalize about.
Government activity: The government can influence the business cycle through fiscal policy (its tax and spend policies) and monetary policy (its control of the money supply, largely through the federal reserve)

The General Theory of Employment, Interest and Money